Robinhood launched in March 2015 and revolutionized stock trading for the “little guys” by offering trades with zero fees, allowing the purchase of tiny fractional shares, and bundling everything into a sleek mobile app.
Today, Robinhood has 31 million users and holds a large share of the “little guy” trading market. Given the company’s rapid growth, and some bad news received in 2021, it is reasonable to wonder what would happen if Robinhood suddenly went out of business. This article will discuss this worst-case scenario.
Will Robinhood Ever go Away?
All good things eventually come to an end, and very few companies stand the test of time. The most likely scenario is that Robinhood simply gets swallowed up by one of the large trading companies that it is currently competing with.
A potential future organized merger between Robinhood and a competitor is nothing to lose sleep over. What is of more concern is what happens if Robinhood suddenly shuts down overnight, as happened in September 2008 with Washington Mutual and Lehman Brothers.
Do I Lose my Stocks if Robinhood Suddenly Shuts Down?
No, you will not lose your stocks if Robinhood fails because the company is a member of the US Securities Investor Protection Corporation (SPIC) which protects brokerage accounts similar to the way the FDIC protects bank accounts. The SPIC guarantees the safety of up to $500K in stocks.
Should Robinhood suddenly collapse, the SPIC would protect your assets, and also help find a new company to take over Robinhood’s accounts. It is estimated that your stock portfolio would be back up and running within a few weeks.
Are my Stocks Safe on Robinhood?
Yes, the SPIC insures up to $500K of your stocks, and would quickly reimburse you if a broker like Robinhood suddenly failed. If you happen to have more than $500K in stocks, it is best to spread your portfolio across multiple brokers.
What Types of Protection do I Have on my Assets Held in Robinhood?
Robinhood fully participates in all of the major protections available to the brokerage industry.
- The SPIC insures customer portfolios up to $500K.
- The FDIC insures customer cash assets up to $250K.
- The Financial Industry Regulatory Authority (FINRA) enforces rules governing the ethical duties of brokers
Is Robinhood in Financial Trouble?
Robinhood has received its fair share of negative press in 2021. In June, the Financial Industry Regulatory Authority (FINRA) fined the company $70M as a punishment for previous system outages and for misleading investors.
The company has also received at least 90 lawsuits related to its handling of the Gamestop price surge. This event forced the CEO of Robinhood to testify in front of Congress.
Most threatening of all, the Securities and Exchange Commission is also thinking about ending the controversial “payment for order flow” business model which is the largest source (72%) of Robinhood’s revenue. The SEC is also scrutinizing Robinhood’s sleek mobile app, saying that its “casino game appearance” could be encouraging risky behavior.
Despite these setbacks, the company moved forward with going public, launching an IPO in August 2021. Its peak stock price of $55 has since slowly declined to $25. The company is not profitable right now, losing $502M in Q2 2021 and losing another $1.3B in Q3.
To summarize: The company that revolutionized stock trading for small investors had a very rough 2021. But, thanks to its IPO, the company is not at any immediate risk of financial failure. However, all eyes are on the SEC as any major regulatory changes to the “payment for order flow” business model could be devastating for Robinhood.